Saudi Aramco shares to remain attractive for investors amid market volatility, analysts say

Based on the Q3 2020 financials and strong profits reported, shares of 98.5% state-owned oil giant Saudi Aramco remain a valuable proposition for investors, according to analysts.

As the company posted a net income of $11.8 billion (SAR 44.2 billion) during the third quarter of 2020, president and CEO Amin Nasser cemented his confidence in Aramco’s ability to manage through the current challenging times and deliver on its objectives.

The earnings were in line with market expectations, which demonstrated Aramco’s financial and operational strengths, despite market volatility and the impact of COVID-19 on global economy.

“Shares of Saudi Aramco remain attractive because of its commitment to pay a substantial dividend up to 2023, and the company’s low cost of operations, making it resilient to periods of low oil prices,” Robin Mills, CEO at Qamar Energy, told Argaam.

The hydrocarbons producer declared a cash dividend of $18.75 billion (SAR 70.32 billion) to shareholders for Q3 2020, in accordance with its decision to pay a base dividend of $75 billion (SAR 281.2 billion) for this year.

“Aramco is still a low-cost producer and a major powerhouse in oil markets and price settings. Its attractive share proposition for investors is being supported by the still ongoing commitment that the company will deliver $75 billion this year in dividends, in stark contrast to the other international oil companies (IOCs),” Cyril Widdershoven, global energy market analyst at Verocy and Global Head Risk Strategy at Berry Commodities, said.

Analysts expect Aramco to tap into the debt market to finance dividend and capital expenditure, as cash flow declined due to lower crude oil prices and volumes sold. “The company will have to increase its borrowing to cover the dividend and capital expenditure if oil prices do not increase next year,” Mills noted.

In May 2020, Aramco entered into a $10,000 (SAR 37,500) one-year term loan facility with various financial institutions for general corporate purposes. The facility currently terminates on May 6, 2021 but Aramco has the option to extend the facility date by up to 364 days from May 6, 2021. Subsequently, on July 27, 2020, the facility was fully utilized and the outstanding loan balance stands at SAR 37,500 ($10,000).

Meanwhile, the oil behemoth has taken measures to optimize spending, which resulted in reducing operational and capital expenditures (CAPEX) during the nine-month period. “Aramco is reducing its own CAPEX to support possible expansion plans or even production in the coming years,” Widdershoven added.

Additionally, Nasser had earlier said in a statement that Aramco will continue to rationalize spending to make sure it maintains flexible capital to manage business, while meeting its commitments when it comes to maximum sustained capacity for oil, gas and the other programs.

Peer performance

Aramco outstripped its rivals in terms of net income, which is higher than the consolidated profit of major IOCs, including ExxonMobil, Chevron, Shell, Total, BP and Equinor. While share prices of major IOCs have fallen by more than 40% this year, Aramco’s shares are down only 1.7% year-to-date (YTD).

Khalid Al-Dabbagh, senior vice president of finance strategy and development at Aramco, was recently quoted as saying that the company maintained a strong net profit for Q3 2020, which is higher than the consolidated profit of major IOCs.

He also highlighted that Aramco’s Q3 2020 cash dividend is the highest among the listed companies worldwide.

Aramco’s gearing increased from 20.1% in Q2 2020 to 21.8% in Q3 2020; nonetheless it remains lower compared to the major IOCs. This reflects an increase in debt for Aramco, in connection with the deferred consideration on acquisition of Saudi Basic Industries Corp (SABIC), the full drawdown of a $10 billion (SAR 37.5 billion) term loan facility, and the consolidation of SABIC’s net debt onto Aramco’s balance sheet.

However, the financial performance of Aramco has shown some signs of strain in today’s uncertain times. While the company turned in an impressive 79.6% quarter-on-quarter (QoQ) jump in profitability, its year-on-year (YoY) profit declined 49% in the first nine months of 2020.

“Although Aramco has kept its promise to shareholders and the payout remained unchanged at $18.75 billion, there are no special dividend payments on the horizon,” Oliver Schutzmann, CEO at Iridium Advisors, said.

Write to Paromita Dey at paromita.d@argaam.com